Carney says UK recovery now rooted

With unemployment down from 7.8% to 7.6%, with growth predictions for this year now 1.6%, up from 1.4% , and for next year pointing to 2.8%, rather than the 2.5% predicted only in August, Mark Carney, new Governor of the Bank of England has announced that the UK economy is in settled recovery mode.

The former hot shot Governor of the Bank of Canada, rated something of a coup for Chancellor George Osborne in bringing him to the Bank of England, reiterated that the Bank will not consider any action to improve our now familiar low interest rates – currently at 0.5% – until unemployment falls below 7%.

Figures suggest that the most likely time this threshold may be crossed is the end of 2016.

However, taking action on interest rates is an instrument used to control inflation. While overall inflation fell in October from 2.7% to 2.2%, the worry is that house price inflation is already rising quickly.

A focus of anxiety here is that a rise in interest rates will bring many who have bought property at the bottom of the recessionary market and at the floor of interest rates, to financial difficulties when mortgage costs rise with interest rates.

We’re not out of the forest yet but there does seem to be a visible path ahead.

The issue is whether or not we build for a sustainable future through investment and reinvestment – or go for the fragility of consumer led recovery. This actually rests upon low interest rates, discouraging saving and encouraging spending.The evidence is that this is the sort of recovery we are seeing.

Loans for house purchase rose 25.6% in August, year-on-year.The Nationwide index showed 5.0% house price inflation year-on-year – a three-year high. This last was not just the result of steeply rising house prices in London, although this was the major hot spot. There were others. In the second quarter, prices rose 3.2% quarter-on-quarter in Humberside and Yorkshire. At the heart of this national improvement is the role of low interest rates.

The detailed key findings of the independent Office of National Statistics for September 2013, the most recent set, are:

The UK house price index level (184.9) has dropped back slightly from the peak last month (186.0). However, annual UK price growth has continued to increase due to larger falls in property prices in September 2012.

In the 12 months to September 2013 UK house prices increased by 3.8%, up from a 3.7% increase in the 12 months to August 2013.

House price growth remains stable across most of the UK, although prices in London are increasing faster than the UK average.

The year-on-year increase reflected growth of 4.2% in England and 1.4% in Wales, offset by falls of 1.1% in Scotland and 1.5% in Northern Ireland.

Annual house price increases in England were driven by rises in London (9.4%), the South East (4.0%) and Yorkshire and The Humber (3.0%).

Excluding London and the South East, UK house prices increased by 1.4% in the 12 months to September 2013.

On a seasonally adjusted basis, UK house prices were unchanged between August and September 2013.

In September 2013, prices paid by first-time buyers were 5.3% higher on average than in September 2012. For owner-occupiers (existing owners), prices increased by 3.2% for the same period.

3 Responses to Carney says UK recovery now rooted

Newsroom said: “However,taking action to allow interest rates to rise will impact unhelpfully on inflation. While overall inflation fell in October from 2.7% to 2.2%, the worry is that house price inflation is already rising quickly.”

Nonsense worthy of an Economics 101 ‘Fail’. There is an INVERSE relationship between interest rates and inflation.

And as for those who bought at the “floor of the recessionary market”, maybe they should have done their sums beforehand. In the first place, based on many measures such as return on capital (rent to value ratio) and house price to earnings ratios, a number of the smarter forecasters reckon house prices have another 30% or more to fall from today’s values before we reach stability. Secondly, did anyone in their right mind believe that mortgage rates, having a sixty year average of about 7.5%, would stay at the ridiculously low “emergency” levels currently in place; if they were so stupid, and I’ve no doubt a fair few were, why should the state protect them at the expense of the less feckless among us?

We apologise for the confused wording you have rightly identified as misleading – the result of two rushed reworkings of elements of that sentence without checking that they related properly to each other. Crude correction now made – will refine later. Thank you for the prompt. You are quite right that people ought to think of the future and of the affordability for themselves of later rises in interest rates before they contract to buy a property. But, in human terms, those who need a house see only an opportunity – and it’s very hard to blame them.. The responsibility also lies with their lenders, who DO know the score and who ought to refuse those who will clearly be in trouble if interest rates rise beyond a narrow threshold. The drivers of the economy are amoral, of course, where one household’s almost certain future disaster is another’s redemption. Builders need to work. Lenders need to lend. It is questionable whether the necessary lessons have really been learned from the catastrophic sub-prime and Alt-A mortgages that were part of the engine of the Autumn of 2008.

And no, the lessons have not been learned. It seems to me that no political party has the guts to tell the truth, that house prices can, and actually must, fall a long way before equilibrium is reached, so hooked is the electorate on the feel good factor of a bubble. Low interest rates are already stoking serious house price inflation in the south east, as are some government policies. Sooner rather than later, this is going to feed into inflationary pressure in the wider economy and this will mean that realistic interest rates will have to be applied (historically, about 7% at present inflation rates). Expect a big “correction” in the housing market when sense eventually prevails. It’ll be good for first time buyers though.